By Todd Monahan, Wolf Commercial Real Estate | CORFAC International
1. Industrial, Warehouse and Distribution Market
The industrial market remained hyper inflated through the first half of 2022. Pennsylvania and New Jersey markets experienced rapidly rising rental rates and historically low vacancy rates, below 3%. Investor demand also reached feeding frenzy levels as abundant capital was chasing limited product. Cap rates dropped as low as 3% for well-leased newer product with credit tenancy.
A confluence of factors have emerged to slow this market sector down. Rising interest rates have put a governor on pricing as financing costs for investors have risen as much as 400 basis points from mid-2022. Although demand from tenants and end users remains strong, Amazon has decided to sublease a sizeable amount of their reserve surplus inventory, anticipating additional demand for their own distribution. Amazon laying off up to 10% of their workforce and rightsizing their portfolio will have ripple effects throughout the sector.
2023 Prediction: Inventory will remain fairly tight despite some notable new deliveries. Tenant demand will slow as ecommerce has peaked and will reach a point of equilibrium. Investor demand remains strong, but financing costs and cap rate suppression have created a gap between buyer and seller expectations, making 2023 a slow year for active trading.
Office Market
Pre-pandemic, many office employers were focused on a workplace strategy that encouraged employees to collaborate, innovate and drive productivity to new heights. Post-pandemic, employers are establishing new workplace strategies that have employees in the office two to three days per week. 2022 became a human resource nightmare as major employers begged employees to return, only to be rebuffed by health concerns and the newfound freedom of work-from-home. Many employers faced significant resistance, with employees threatening to leave for permanent remote opportunities. As the war for talent raged on, employees had the leverage necessary to demand flexibility.
The pendulum has begun to swing back, and employers are regaining leverage. Job cuts by Salesforce and other major employers will move the labor market back towards equilibrium. Options for remote work are decreasing. Employers are continuing to beat the drum for a return to the office, even part of the week.
2023 Prediction: Employees will continue to return to the office several days per week. We all agree the full-time in-office model is over. However, some employers have seen a reduction in productivity with remote work and require in-person employee interaction to build culture and mentor junior employees. In 2023, as a slowdown in the economy cools the job market and reduces fully remote options, the leverage will swing back towards employers.
Life Sciences
Venture capital investment into the life sciences sector, particularly gene and cell therapy, slowed in 2022. However, due to extreme demand for lab and life sciences space, developers have responded with a number of spec lab and life science projects. Brandywine’s 3025 JFK, Wexford’s UCity Square, Silverstein’s 3.0 University Place and Ensemble Mosaic’s 1201 Normand at the Navy Yard lead the list of new builds.
2023 Prediction: Due to pent-up demand and a shortage of available space, new deliveries will lease up consistently through 2023 bringing the market of supply and demand closer to equilibrium. Rental rates will hold firm amid the strong demand for life science space and the high cost of construction. Landlords will command their proforma lease terms.
Todd Monahan is executive VP & managing director of WCRE | CORFAC International.
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